Business Brain: Are you self-employed or staff? It makes a big difference on tax
FROM time to time, there is a need for doctors in general practice (GPs) to avail of the services of other doctors (locums) to fill temporary vacancies.
Are these locums self-employed or employees of the GPs? The answer matters for many self-employed people other than doctors
The Revenue Commissioners carried out a review in 2010 to examine this question and to ensure best tax practice on payments to locums.
The result of this review was that where doctors were engaged by a GP practice during 2009, PAYE should have been applied to the payments to locums.
For 2010, any additional tax, PRSI and levies accrued resulting from payments to locums must be remitted to Revenue.
With an ever-increasing number of people losing their jobs and starting up businesses -- and maybe also taking on contract work -- whether or not they are to be regarded as employees of a company or as a self-employed individuals is of utmost importance.
It is essential to be aware that what Revenue may deem to be 'employed' or 'self-employed' is very much examined on a case-by-case basis.
I have listed below some of the main factors to be considered when deciding whether an individual may be regarded as an employee or not.
This was issued as a code of practice by the Employment Status Group. Whilst all of the following factors may not be applicable, an individual would normally be an employee if he or she:
- is under the control of another who directs as to how, when and where the work is to be carried out;
- supplies labour only;
- receives a fixed wage, hourly/weekly or monthly;
- cannot sub-contract the work;
- does not supply materials for the job;
- is not exposed to personal financial risk in carrying out the job;
- works set hours or a given number of hours per week;
- receives expense payments to cover subsistence and/or travel expenses.
The following example may be helpful to demonstrate the practical issues that arise in considering the various factors that can determine one's taxable status
Julia is an interior designer, but now that people are no longer spending freely on the fanciest of homes, the company she worked for has slimmed down its workforce, and she is considering working as a design consultant.
There is also the potential to work on a six-month contract for NiceHome Ltd, a small design business which would benefit from Julia's experience.
Should Julia work from home as a consultant and contract out her services to a number of clients, then she would be regarded as self-employed for tax purposes.
The benefits of this are that she has far more scope in claiming expenses as a deduction from her consultancy income than if she was an employee.
Broadly speaking, any expenses that are incurred for the purposes of providing her design services should be allowed as deductions from her income.
If she is working from home, then she could also be in a position to claim as expenses an element of house expenses, e.g. electricity, gas, telephone and internet. Also, from a personal perspective, she has far more flexibility and a far smaller commute.
There are a number of drawbacks in being self-employed.
As she commenced her consultancy in March 2010, she will be obliged to file an income-tax return in respect of this 2010 income by 31 October 2011.
She will also have to pay preliminary tax for the 2011 tax year (basically an advance payment on account for the following year).
Depending on her level of turnover, she may also have to charge VAT on her services, and this must then be remitted to Revenue.
Also, a recent budget change means that PRSI for self-employed individuals has been increased from 3pc to 4pc.
Julia likes the idea of working from home and the flexibility it provides.
However, should she decide to take the short-term contract with NiceHome Ltd, she will be regarded as an employee (based on the various factors outlined earlier e.g. fixed hours, place of work etc) and go through the company's payroll.
She will not have the extra burden of having to file income-tax and VAT returns, or keeping an eye on her cash-flow. Her tax credits (which help reduce the tax she pays each year) will also be augmented by receiving an addition credit for being a PAYE worker (€1,650 for 2011).
There is, however, far more limited scope for claiming expenses as a way of reducing her taxable income.
In conclusion, it is very important to consider whether or not Revenue may consider you as self-employed or an employee, depending on the type of work that you are doing. This can have a large impact on your tax affairs and is important to examine in detail should there be any doubt.
Simon Ball is the founder of SB Tax Consultants and an associate of the Irish Taxation Institute